What does this mean for business?

The result of the EU referendum was announced on Friday, 24 June 2016 with a vote in favour of the UK leaving the EU. In this briefing we outline what happens next and the exit process, based on the position as it stands today, 24 June. We also identify some of the issues that businesses should be considering now and the steps that they should be taking. It is clear that the “Leave” vote will lead to political uncertainty which could have a significant impact on the exit process. We will keep you updated on developments via our Brexit hub.

Although it will be some time before the terms of the UK’s future relationship with the EU are known, there are things that businesses can consider and plan for now, and changes they can start to make, to help protect their interests. Planning will help put businesses in the best possible position in the uncertain months to come. The shape that Brexit will take is not certain and there is scope for businesses to be involved, on their own or together with their trade bodies, to influence the outcomes of the EU/UK negotiations in relation to their sector.

What is the exit process?

Article 50 of the Treaty on European Union (“TEU”) sets out the mechanism for leaving the EU. Notice of the UK’s intention to leave must be given to the European Council (which includes the Heads of State / Governments of the EU Member States). Once this is given, negotiations between the UK and the rest of the EU to agree a withdrawal agreement will commence. The agreement will also take into account the framework for their future relationship together.

In terms of timing, the UK will stop being an EU Member State on the earlier of a withdrawal agreement being concluded or two years from the date of notice. This two year period can be extended by the unanimous consent of the UK and all of the other EU Member States. Most commentators believe that it will be extremely difficult to negotiate the withdrawal agreement, never mind a trade deal, with the EU in the two year timeframe.

The withdrawal agreement will need to be agreed by the EU Parliament and the European Council as well as the UK Parliament.

During the negotiation period, the UK will remain a full EU Member State and will continue to take part in all EU decision-making except in relation to the withdrawal agreement.

When will notice to leave the EU be given?

The UK does not have to give the Article 50 notice immediately and it may well be that this will be delayed by the UK Government. There has been much speculation about the leadership of the Conservative Party following a “Leave” vote and this may delay the process. Importantly the Leave campaign is not a political party with a clear manifesto but a grouping of politicians with a common belief. As such, there are differing views within the Leave campaign as to what the UK will seek to achieve in these negotiations. The UK Government will need to spend time working out its position and delay in serving the notice will allow time to do this. While the Government can trigger Article 50 at any time, there is no mechanism for the EU to compel the UK to trigger it.

There are commentators who suggest other mechanisms for leaving the EU but the one outlined above is the one that is generally accepted.

Does the UK still have to comply with EU law?

The short answer is yes – nothing changes until the UK actually leaves the EU. During the negotiation period, the strict legal position is that the UK and businesses operating in the UK must continue to comply with EU law and EU law will still be enforceable in the UK. Free movement of goods, people, services and capital will continue and the UK will continue to make contributions to the EU budget. The UK will be required to implement any new EU laws that are due to come into force during the negotiation period.

A number of commentators have, however, suggested that there could be a ‘go slow’ in relation to the implementation of new EU laws during the negotiation and withdrawal period. During the referendum campaign, Vote Leave said that it would move to pre-empt a UK exit, including proposing bills to limit the powers of the Court of Justice of the EU (“CJEU”), to make VAT changes, to allow the UK to make its own trade deals and to limit EU immigration. These could cause clashes with Brussels and put the UK in breach of its obligations under international law.

What will the UK’s trading relationship with the EU be post-Brexit?

Trade deals are very hard to negotiate; they tend to take many years to agree. To achieve a full trade deal between the UK and the EU in two years would be a remarkable feat. In practice, all EU Member States would need to agree the terms of any new trade deal.

Post-Brexit, the UK’s relationship with the EU could take one of a number of forms. Eversheds has set out a detailed examination of five possible models on which a post-Brexit EU/UK relationship could be based – you can find these in our brochure "Making Sense of Brexit". At this stage there is no clear vision of what the UK would want that relationship to be. Even within Vote Leave there are differences of opinion on this issue but it will be the UK Government, not Vote Leave, that will lead the negotiations.

If no trade deal is agreed within the relevant time frame, the UK and the EU will trade under the terms of the World Trade Organisation ("WTO"). This would mean that the EU would be obliged to impose its Common External Tariff on UK imports and the UK would be free to impose import tariffs on goods entering the UK (from the EU and elsewhere). Goods would also be subject to custom barriers. The EU’s Common External Tariff varies from 0% on cotton, 11.5% on clothing, 25.6% on sugar and confectionery, to 45% on certain dairy products. Goods exported to the EU would still need to comply with EU standards.

For businesses in the UK who import from or export to the EU or are part of an EU corporate group this uncertainty means that planning is very difficult if not impossible. Businesses should look at the various models and work out the implications of those models. Lawyers in our export control and trade group have been advising clients on the impact of Brexit on tariffs for their particular business in the run up to the referendum. Contact one of our trade lawyers for further information.

Trading with the rest of the world

Once the UK leaves the EU the UK will lose the benefit of the EU’s free trade deals with non-EU countries. The UK will no doubt look to replace these and create trade relationships with countries

where the EU does not have a relationship. Vote Leave has said that it will start to negotiate trade deals during the withdrawal period, though whether the individuals who make up the Vote Leave group will have the authority and whether the UK will have the resource to do so are both moot points.

What happens to those laws deriving from the EU on Brexit?

To answer this question, some understanding is needed on the different instruments used to implement EU law.

EU Treaties form the constitutional basis of the EU and create the Single Market supported by the four freedoms of movement in goods, people, services and capital. The EU Treaties are implemented into UK law through the European Communities Act 1972 ("ECA"). The ECA provides for the supremacy of EU law in the event of a conflict over UK law and also provides the legislative basis for transposing EU law into UK law.

Some EU laws are implemented by means of a Directive. EU Directives set out general rules to be implemented into national law by each country as they deem appropriate. In the UK, they are implemented via primary legislation such as Acts of Parliament or secondary legislation such as Statutory Instruments in order to have effect. Other laws are implemented by means of a Regulation. EU Regulations are directly implemented into UK law and do not require legislation from UK Parliament. However, some have been implemented explicitly into UK law. EU laws are also made through the judgments of the CJEU which UK courts and regulators are required to follow.

Which EU laws will continue to apply in the UK when the UK leaves the EU will depend on the model of Brexit that is adopted – if the UK were to join the European Economic Area ("EEA") for example to take advantage of being in the Single Market then it would have to continue to be bound by Single Market laws.

If the UK is not required to comply with any EU laws as part of the withdrawal agreement, the EU Treaties will no longer apply to the UK. We expect the ECA to be repealed or amended at the same time so that EU law will no longer be supreme over UK law.

What will happen to existing EU law, whether:

  1. EU Regulations;1
  2. EU Directives implemented by secondary legislation (for example, Statutory Instruments) under the ECA; or
  3. Separate Acts of Parliament implementing EU law?

Categories (1) and (2) will no longer have effect in the UK unless the UK Parliament introduces UK legislation or amends the ECA, to the contrary.

Category (3) will remain in place until the UK Parliament decides which should remain, be repealed or superseded.

Judgments of the CJEU which have been reflected in subsequent UK law including in UK court judgments will continue to apply until the UK Parliament or UK courts decide otherwise.

The review process of deciding which EU laws should continue to be applicable in the UK will take many years. As time goes on there could be an increasing divergence between EU and UK law. Therefore, UK businesses that wish to continue trading with the EU may have to comply with two sets of laws.